DETERMINATION OF NATIONAL INCOME · 2018-04-26 · NDPMP = NNPMP – Net Factor Income from Abroad...
Transcript of DETERMINATION OF NATIONAL INCOME · 2018-04-26 · NDPMP = NNPMP – Net Factor Income from Abroad...
DETERMINATION OF NATIONAL
INCOME
The two broad topics covered in this chapters are:
1. NATIONAL INCOME ACCOUNTING
- Definition.
- Importance.
- Methods
- Types of goods
- GDP – NDP
- Types of incomes
- Methods to calculate NATIONAL INCOME
2. THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME
- Circular flow in a simple two - sector model
- Propensity to consume
- The investment multiplier
- Three sector economy
- Four sector model
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National income is defined as the Net value of all economic goods and services produced within
the domestic territory of a country and Net factor income from abroad (NFIA) in an accounting
year.
Introduction and Definition of
NATIONAL INCOME
NORMAL RESIDENT
Normal residents are those persons who are ordinarily resides in a country in which they live and
whose economic interest lies in that country
DOMESTIC
TERRITORY
Domestic territory
can be understood
by political and
geographical
boundaries within
the country.
ACCOUNTING
YEAR
Just like in the
case of P&L
account, Cash
flow. But Balance
sheet is prepared
as on or till date.
NET VALUE
Here NET means
net of
depreciation.
ALL ECONOMIC
GOODS
All economic goods
refer to all FINAL
goods. Final goods
can be termed as all
finished goods.
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The major points discussing the need to calculate National Income:
To evaluate the short
term performance of
a country. It will
indicate the
economic
development as well
as demand for goods
and services
To find the inequality
(if any) in the
economy and also
Distribution Pattern
of demands.
To calculate Per
capita Income.
Per capita Income =
Total National
income/Total
Population
Composition and
structure of national
income in terms of
different sectors.
National income
also provides
quantitative
statistics for
macroeconomics.
Structural statistics
such as Ratios of
investment, taxes or
government
expenditure to GDP.
International
comparisons are
needed to evaluate a
nation’s growth and
the room for
improvement.
It can be also used
to lend money
National income
gives the variable to
forecast and to make
projection of
business modules.
SNA
UN (United Nations) formed an organization System of National Accounting (SNA) to provide a
comprehensive conceptual and accounting framework for complying and reporting
macroeconomics statistics for calculating National Income.
It gives the rules to calculate NI just like ICAI gives us standards and rules to maintain books of
accounts.
CSO
Central Statistical organization is the body which calculates all kind of GDPs, NNPs and other
factors of INDIA
USES AND SIGNIFICANCE OF NATIONAL INCOME
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DIFFERENCE BETWEEN NON ECONOMIC AND ECONOMIC ACTIVITIES
It produces goods and services but don’t command any market value (Hobbies, child rearing Facebook)
Non-economic activities does not includes in national income
Can be illegal activities.
1. All human activities which create goods and service.
2. It includes in national income.
3. Cannot be illegal activities.
Definition Gross Domestic Product (GDP MP)
It is a measure of all final economic goods and services during a given period of time in market value
GDP includes Depreciation.
Within the domestic territory of a country
Sum total of value added by all producing units.
Excludes:-
- Transfer payments
- Illegal transaction
- Gifts
- Gambling etc.
Nominal GDP = GDP MP
GDP taken into consideration with market price
RealGDP = GDP constant price
GDP taken into consideration with constant price of a chosen base year.
The GDP will change according to the change in the average price level.
The real GDP changes only when production changes.
This misleading because it does not reflect the changes in the actual volume of output.
This reflects true and fair view of GDP.
GROSS NATIONAL PRODUCT (GNP)
GNPMP = GDPMP + Net Factor Income from Abroad
GDPMP = GNPMP - Net Factor Income from Abroad
NET DOMESTIC PRODUCT AT MARKET PRICES (NDP MP)
NDPMP = GDPMP – Depreciation
NDPMP = NNPMP – Net Factor Income from Abroad
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Production of
goods and
services
Distribution as
factor incomes
(Rent , Wages,
Interest ,Profit
Disposition
Consumption
/Investment
Market price = Factor cost + Net indirect taxes
= Factor cost + net indirect taxes – Subsidies
Factor cost = Market price – Net indirect taxes
= Market price – Net indirect taxes + subsidies
Gross domestic product at factor cost (GDPFC)
= GDP MP – Indirect taxes + subsidies
= compensation of employees
+ Operating surplus (rent + interest + profit)
+ Mixed income of self – employed
+ Depreciation
So, GDPFC – Depreciation = NDPFC
NDPFC + NFIA = NNPFC
NNPFC = National Income
Households>>> (factor of production)>>>firms>>> (salary and wages)>>>Households>>> (buy goods and services)>>>firms.
This process is always continuing and the flow of income is circular in motion.
It is a simple two- sector model, assuming no government banks or foreign trade
PER CAPITA INCOME
GDP per capita is a measure of country’s economic output per person.
It is obtained by GDP adjusted by inflation and then divided by total population
It reflects the standard of living of a country.
PERSONAL INCOME
Income received by the household including non – profit serving household.
Actual current income receipts of persons from all sources (may not be from productive activities)
Examples
- Pensions
- Gifts
Not included in NI
DISPOSABLE PERSONAL
INCOME
It is a measure of amount
of the money in the hands
of the individual available
for their savings or use.
It is derived from personal
income by subtracting the
taxes and other
compulsory payments
made to the government.
NET NATIONAL PRODUCT AT MARKET PRICES (NNP MP)
4. NNPMP = GNPMP – Depreciation
5. NNPMP = NDPMP + Net factor Income from Abroad
6. NNPMP = GDPMP + Net factor Income from Abroad– Depreciation
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VALUE ADDED METHOD/PRODUCT METHOD/INDUSTRIAL ORIGIN METHOD/NET OUTPUT METHOD
National Income by value added method is the sum total of NVA FC.
So, there are 3 sectors of economy:
Primary sector
Secondary sector
Tertiary sector/service sector
Items should be included in this method are:-
a) Own account production of fixed assets by government, enterprises and households.
b) Production for self – consumption
c) Imputed rent of owner occupied houses.
Gross value added (GVA MP)
= Value of output – Intermediate Consumption
= (Sales + change in stock) – Intermediate consumption
GVA MP – Depreciation = Net value added (NVA MP)
NVA MP – Net indirect taxes = Net domestic product (NVA FC)
Net domestic product (NVA FC) + NFIA = NNPFC/National Income
INCOME METHOD/FACTOR PAYMENT
METHOD/DISTRIBUTED SHARE METHOD
Methods for calculating national calculation
Three methods of calculating national income
Production is carried out by the combined effort of all factors of production.
Factors are paid factor incomes for the services rendered.
It is calculated by summation of factor incomes paid out by all production units like wages (in kind or cash), salaries, rent, interest and profits.
It includes payments to both residents and
NDP FC
= compensation of employees + operating surplus( rent + interest + profit) + Mixed income of self-employed
NNP FC/National Income
= compensation of employees + operating surplus( rent + interest + profit) + Mixed income of self-employed + NFIA
EXPENDITURE METHOD/INCOME DISPOSAL APPROACH
The sum total of final expenditure (GDP MP)
1. Private final consumption expenditure
2. Government final consumption expenditure
3. Gross domestic capital formation:-
- Gross fixed capital formation
- Inventory investment (Closing – Opening)
4. Net exports (Exports – Imports)
GDP MP + NFIA = GNP MP
GNP MP- Indirect taxes = GNP FC
GNP FC – Depreciation = NNP FC
Therefore, NNP FC = National Income
LIMITATIONS AND CHALLENGES OF NATIONAL INCOME COMPUTATION
CONCEPTUAL DIFFICULTIES:
1. Lack of an agreed definition of national income.
2. Distinction between Final and Intermediate goods.
3. Issue of transfer payments.
4. Services of durable goods.
5. Incorporating distribution of income.
6. New good at constant price.
7. Others:-
- Inadequacy of data.
- Non – monetized sector.
- No records of income (illiteracy and ignorance)
- Lack of occupational classification.
- Consumption of fixed capital.
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THE KEYNESIAN THEORY OF DETERMINATION OF NATIONAL INCOME
Equilibrium output:-
An economy can be said to be in equilibrium when the production plans of the firms and the expenditure plans of the households match.
AVERAGE PROPENSITY TO CONSUME [APC] = C / Y
Income(y) Consumption (C ) APC (C/Y)
0 40 -
100 120 1.2
200 200 1
300 280 0.93
400 360 0.90
MARGINAL PROPENSITY TO CONSUME [MPC] = ∆C / ∆Y
Income(y) Consumption (C )
∆C ∆Y MPC (∆C/∆Y)
0 40 - - -
100 120 80 100 0.80
200 200 80 100 0.80
300 280 80 100 0.80
400 360 80 100 0.80
AGGREGATE SUPPLY (AS)
The money value of goods and services that all the produces are willing to supply in an economy in the given period of time.
Aggregate supply (AS) = National Income (Y)
AS = Y = C + S
Income(y) Cons. (C) Savings AS
0 40 -40 0
100 120 -20 100
200 200 0 200
300 280 20 300
400 360 40 400
Y = C [Breakeven point (no savings)]
Three sector model
(Government)
Four sector model
(Net Exports)
The 2 sector model with Investment AND
INVESTMENT MULTIPLIER
DIS
SAVINGS
INVESTMENT MULTIPLIER
It is believed that on initial increment in investment leads to greater increase in income. Multiplier expresses the relationship between increases in investment due to increase in income.
Multiplier (k) = change in income
Change in investment
= ∆Y/∆I
Consumption function and saving functions
Y =C + S (S =I, Assuming economy is in equilibrium)
Y = C+I
∆Y/∆Y = ∆C/∆Y + ∆I/∆Y
= 1 = MPC +1/ K
OR, 1/K = 1- MPC
= K = 1/1-MPC
OR, K = 1/MPS
On the contrary, higher the MPS, lower will be the value of multiplier and vice-versa. The maximum value of multiplier in infinity when the value of MPC is 1 i.e. the economy decides to consumes the whole of its additional income. We conclude that the value of the multiplier is the reciprocal of MPS.
INCOME LEAKAGES ON MULTIPLIER
Income that is not spent on currently produced consumption goods and services may be regarded as having leakage out of income stream. If the increased income goes out of the cycle of consumption expenditure, there is a leakage from income stream which reduces the effect of multiplier.
Reasons:-
Progressive rates of taxation.
Idle savings.
Existing stocks or imports.
Government securities.
Undistributed profits.
Inflation.
Scarcity of goods and services despite having high MPC
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DETERMINATION OF EQUILIBRIUM INCOME: FOUR SECTOR MODEL
The four sector model includes all four macroeconomic sectors:
1. The household sector,
2. The business sector
3. The government sector
4. The foreign sector
Y = C + I + G + (X-M) (Net exports)
IMPORTS AFFECT ON INVESTMENT MULTIPLIER:
The more open an economy is to foreign trade, (the higher v is) the smaller will be the response of income to aggregate demand shocks, such as:
1. Changes in government spending
2. Autonomous changes in investment demand
3. Additional leakage from the circular flow of (domestic) income
DETERMINATION OF EQUILIBRIUM INCOME: THREE SECTOR MODEL
The three-sector, three-market circular flow model which accounts for government intervention highlights the role played by the government sector. The government sector adds the following key flows to the model:
i) Taxes on households and business sector to fund government purchases
ii) Transfer payments to household sector and subsidy payments to the business sector
iii) Government purchases goods and services from business sector and factors of production from household sector, and
iv) Government borrowing in financial markets to finance the deficits occurring when taxes fall short of government purchases.
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